Budget 2018: How income tax slabs have changed over the years and the way forward

The government feels that the I-T Act, which was drafted almost 60 years ago, needs to be redrafted in sync with the economic needs of the country in present times.

From a mind boggling 97.75 per cent as the highest tax rate and 11 tax slabs, to 30 per cent as the highest rate and three slabs, India and its taxpayers have come a long way since Independence. It is that time of the year again where many of our conversations are centered around what the finance minister is likely announce regarding income tax rates.

Even though every year expectations are high, not every Budget has many big bang tax reform announcements. In fact, a lot of them have been non-events. It has been some time since we have seen major changes in the direct tax structure - the last one was in 1997 when P Chidambaram was the Finance Minister. It was dubbed as the 'Dream Budget'.

Understandably, with this being an election year, the pressure is high for finance minister Arun Jaitley and his motley crew of finance ministry officials.

Although Jaitley left the tax slabs unchanged this year, here is how the tax slabs have evolved since Independence:
1949-50: This was the first time the tax rates were tinkered with in Independent India. The then finance minister, John Mathai reduced tax on incomes up to Rs 10,000 by a quarter of an anna, from one anna to nine pies in the first slab, and from two annas to "one nine pies" in the second slab. (An anna was a currency unit formerly used in India and Pakistan, and it is equal to 1/16 a rupee. It was divided into 4 paisa or 12 pies, thus there were 64 paise in a rupee and 192 pies).

1974-75: Y. B. Chavan cut the maximum marginal rate from an eye watering 97.75 per cent to 75 per cent. Taxes were lowered at all levels of personal incomes. Here is what he did: No income-tax for those earning up to Rs.6,000; marginal rate of basic income-tax was kept at 70 per cent on the income slab over Rs.70,000. The rate of surcharge was reduced to a uniform level of 10 per cent for all categories. The combined incidence of income-tax and surcharge would amount to 77 per cent of the taxable income in the highest slab. Wealth tax was increased.

1985-86: This was a big one. Vishwanath Pratap Singh restructured the tax structure by reducing the number of income tax slabs from eight to four. The highest marginal rate of income tax on personal incomes decreased from 61.875 per cent to 50 per cent. Those earning less than Rs.18,000 paid no tax, the rate of income tax on the slab of Rs18,001 to Rs25,000 was fixed at 25 per cent; on the slab of Rs25,001 to Rs50,000 it was 30 per cent; on Rs50,001 to Rs1 lakh tax was 40 per cent; and on the income in excess of Rs1 lakh it was 50 per cent.
1992-93: It is starting to look a lot like the tax structure we know today. Manmohan Singh reduced the number of slabs to three. Entry rate was 20 per cent applicable for incomes Rs 30, 000 to Rs 50,000, a middle slab for incomes between Rs 50,000 and Rs1 lakh with a tax of 30 percent, and a maximum rate of 40 per cent for those earning above Rs1 lakh.
1994-95: After a gap of two years, Manmohan Singh adjusted the tax slabs but kept the rates unchanged. The first slab was set at Rs 35,000 to Rs. 60,000, with the same rate of 20 per cent tax, second slab was set as Rs 60,000 to Rs 1.2 lakh with the same rate of 30 per cent tax, and maximum tax rate of 40 per cent was set for income over Rs 1.2 lakh.
1997-98: Although V.P Singh and Manmohan Singh were the ones to cut the number of slabs in their budgets, it was P. Chidambaram who presented the 'Dream Budget'. He replaced the prevailing rates of 15, 30 and 40 per cent with 10, 20 and 30 per cent. Those in the first slab earning Rs 40,000 to Rs 60,000 paid a tax of 10 per cent, 20 per cent in the slab of Rs. 60,000 to Rs. 1.5 lakh, and 30 per cent for all income above Rs. 1.5 lakh. He also increased the limit of standard deduction to Rs. 20,000, which would apply uniformly to all salaried taxpayers. Further, it was announced that all employees drawing a salary of Rs 75,000 per annum and contributing 10 per cent to the provident fund would have to pay no tax at all.
2005-06: After almost 10 years, it was once again Chidambaram who announced some considerable changes in the tax brackets. He announced that those earning up to Rs 1 lakh would pay no tax, those earning Rs 1 lakh to Rs 1.5 lakh were taxed at 10 percent, Rs1.5 lakh to Rs2.5 lakh were to be taxed at 20 per cent, and those earning over Rs2.5 lakh were to pay 30 per cent as tax.
2010-11: After a gap of five years, Pranab Mukherjee, changed the income slabs. He announced that those earning up to Rs 1.6 lakh would pay zero tax, those in the income bracket of Rs 1.6 lakh to Rs 5 lakh would pay 10 percent, those in the bracket Rs 5 lakh to Rs 8 lakh would pay 20 percent, and anyone earning more than Rs 8 lakh would pay 30 per cent.
2012-13: Not only did Mukherjee increase the exemption limit for the general category of individual taxpayers from Rs 1.8 lakh to Rs 2 lakh, he also changed the tax slabs slightly. He announced that those earning up to Rs 2 lakh a year did not have to pay tax, those earning between Rs 2 lakh and Rs 5 lakh would now pay 10 per cent, those earning Rs 5 lakh-Rs10 lakh would pay a tax of 20 per cent, those earning above Rs 10 lakh would pay 30 per cent.
2014-15: With the passage of Finance Bill, 2015, wealth-tax was abolished with effect from assessment year (AY) 2016-17. Arun Jaitley replaced the wealth tax with a surcharge of 2 per cent on the super-rich with a taxable income of above Rs 1 crore. Taxpayers, therefore, were not required to file a wealth tax return from AY 2016-17 onward.
2017-18: Jaitley reduced the existing rate of taxation for individual assesses with income between Rs 2.5 lakh and Rs 5 lakh to 5% from the present rate of 10%. Added to this, the existing rebate under Section 87A of the Income-tax Act, 1961 (which was earlier given to people earning up to Rs 5 lakh) was also reduced to Rs 2,500 from Rs 5,000 for those earning between Rs 2.5 lakh and Rs 3.5 lakh. Hence, due to the combined effect of the new rebate under Section 87A and the reduction in the lowest slab to 5 percent, the tax burden for those earning up to Rs 3 lakh would be nil, and for those in the Rs 3 lakh to Rs 3.5 lakh bracket would be Rs 2,500.
The way forwardJust like Goods and Service Tax (GST) changed the indirect tax landscape, a similar reform is expected to change the direct tax regime as well.

Earlier, the United Progressive Alliance (UPA) government had made an attempt to reform the age old taxation system by introducing The Direct Tax Code Bill (DTC), 2010. The DTC was aimed at consolidating and integrating all direct tax laws by replacing the Income-tax Act and the Wealth Tax Act, 1957 and rationalising the exemptions. The Bill had proposed an annual income tax exemption limit at Rs 2 lakh, and levying 10 per cent tax on income between Rs 2 lakh and Rs 5 lakh, 20 per cent on Rs 5-10 lakh, and 30 per cent for incomes above Rs 10 lakh. Although the Bill was introduced in Parliament in 2010, it lapsed with the dissolution of the 15th Lok Sabha.

The present government, too, feels that the income tax Act, which was drafted almost 60 years ago, needs to be redrafted in sync with the economic needs of the country in present times. In November 2017, the government had constituted a task-force, which is to submit its report within 6 months. The panel has been tasked to draft a direct tax legislation keeping in view the tax system prevalent in various countries, international best practices, economic needs of the country, and to widen the tax-base.

Gokul Chaudhari, Partner, Deloitte India says "the income tax law can hardly be read by a layman, as the text is interwoven with cross linkages and references which move across the entire law. Some basic alignment of definitions and provisions, simplification of language, weeding out of redundant provisions, clarity to ambiguous and litigious clauses, would be helpful for a neat, concise and well-articulated code. The new code could focus on provisions that enable and align to technology for compliance including e-filings, e-assessments and reporting for CBCr and the like."

The tax structure in the country has remained more or less the same in the past 20 years. The country needs a tax structure that is in tune with the changing trends to the workforce and their savings habits. We will have to wait and watch to see what the recommendations the DTC task-force will submit in its report and what shape and form it will finally take.